Africa Investment Outlook 2012

Africa Investment Outlook
Key Investment Drivers, Investment growing trends, Sustainability of Investment Impact, Consumer markets
Report by Sharon Obuobi
Contents
I. II. III. IV. Overview Introduction
a. The Investment Scene: Growth with risks
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4 5 5 6 6 7 7 7 7 8 8 8 9 10 10 11 12 12 12 13 14 14
Growing global appetite in investment opportunities

a. Federal Bonds b. Increased Competition
Key investment drivers

a. b. c. d. e. f. Surging External Demand Chinas investments Increase in Urbanization Robust Commodity Prices Improved Economic Policies and Management Demographics The three-tier consumer markets The Mobile Phone Revolution Natural resources Chinese investment in Africa Outsourcing of economic activities to Sub-Saharan Africa Low cost inputs and consumption goods Access to more appropriate technologies
V.
Investment growing trends

a. b. c. d. e. f. g.
VI.
Investment Challenges
a. Inflation concerns b. An infrastructure crisis c. Drought
VII.
Key Considerations
a. The Demographic Divide b. Chinese Conflicts of Interest c. Uncertain Stock Markets
VIII. IX.
Sustainability of the Impact of Investment Drivers Appendix

a. b. c. d. Sub-Saharan Africa: Country Groupings Member Countries of Regional Groupings Africas Distribution of Resources Total Investment in Africa
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15 16 17 18
Overview
Africas economy has grown by 5% per year over the past 15 years, driven by rising exports, increased investment, and economic policy liberalization. This research report begins with the setting of the investment scene. Next is the growing global appetite in investment opportunities, exploring the factors of federal bonds and increased competition among investment players. A definition of the key investment drivers follows with an explanation of the effects of the surging external demand, Increase in Chinas investments, increase in urbanization, robust commodity prices and improved economic policies. An investigation into investment growing trends is next with an introduction to the opportunities and challenges. The report ends with some recommendations on enhancing sustainable investments in Africa and some key considerations.
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The Investment Scene: Growth with risks

Sub-Saharan Africa: Output Growth
According to the IMF, in the sub-Saharan African regions seven oil exporters, higher oil and gas production levels should be sustained by continued strong oil demand, and non-oil activity, particularly in the public sector, is being underpinned by the resurgence of hydrocarbon revenuesa pattern most evident in Angola. Consequently, growth in the oil-exporting countries is projected to average 6 percent this year and 7 percent in 2012.
Sub-Saharan Africa: Macroeconomic indicators Dec 2005 June 2011
The IMF reports that there has been a significant and rapid reorientation of exports toward China, India, and other developing countries over the last decade. More than half of the regions trade 4
Africa Investment Outlook (both exports and imports) is now with nontraditional partners, and investment lows are moving in a similar path. The immediate payoffs from this reorientation of trade include reduced export and output volatility.
Growing global appetite in investment opportunities

According to Dominic ONeills Euromoney article entitled, Investment Banks Eye The Last Frontier: Africa, with expectations that Sub-Saharan Africa's GDP growth rate will rise as high as 7% in comparison to South Africas expected 3.5% many investors Western, Chinese, and South African alike are eyeing Sub-Saharan Africa with renewed interest.
Federal Bonds
With this in mind, the role of African governments is of even greater importance due to the need for better-developed infrastructure in order to cater to rapidly rising populations and the fostering of economic growth. ONeill states that in 2011, Nigeria launched its first dollar sovereign bond while Zambia and Senegal both obtained sovereign credit ratings for the first time. Other governments, such as those of Kenya and Tanzania, are preparing their first dollar bonds, which is likely to facilitate more issuance from these countries by banks and corporates.
Increased Competition
According to ONeill, Africas wholesale-banking revenue currently totals more than $850 million a year. In addition the level of competition in increasing significantly as French, UK and US banks make plans to finance projects in Sub-Saharan Africa. Similarly, South Africa's biggest banks are considering opportunities north of the border. Due to South Africas economys commoditiesdriven nature, its firms are already strong in infrastructure and resource financing which is much needed across Africa. In Africa, Standard Chartered is making plans to expand in the securities services market, as well as public equity. Banks like Standard Bank have increased personnel in Africa investment banking to boost capabilities in debt capital markets in Nigeria, equities in Kenya, and investment banking in Ghana.
Key investment drivers

Surging External Demand
A new key investment driver has been the surge in external demand, particularly from China and India, which are the fastest-growing countries in the world and hungry for resourcesespecially oil and minerals. According to the Economist, OECD growth will be weak and fragile while China, India, and most other emerging markets power ahead and help to keep commodity prices high.1
Chinas investments
Chinas high-profile investments in Africa have also helped to put the continent on the global investment map. Chinas meteoric rise over the last two decades and the expectation that it will grow faster than most other major economies well into the future, means the Chinese authorities are on a quest to secure access to raw materials.
Sector Composition of Chinas Investment in Africa by end-2009
Africa Investment Outlook China is finding many of the minerals and oil it needs in Africa, and is building much-needed infrastructure in return. Furthermore, China is looking to cultivate markets it can reap. Africa is a virgin market. From a long-term manufacturing point of view, costs have increased in China and they will start to invest in manufacturing in Africa.
Increase in Urbanization
Another new key investment driver has been the increased pace of urbanization and consumerism as Africans flock to the cities, disposable incomes rise, demand for modern goods and services such as telecommunications and banking services accelerate. Africa is urbanizing rapidly with about 40% of the population now living in cities. This ratio is higher than that of India and lower than that of China.
Robust Commodity Prices

There is a stronger global demand for commodities in the aftermath of recession, driven in particular by the burgeoning appetites of China and India for minerals and energy products, which are boosting commodity prices. Higher commodity prices, in turn, are driving investment in exploration and extraction.
Improved Economic Policies and Management

The apparent willingness of countries in Africa to implement economic reform has improved the attractiveness of the region to foreign investors and businesses that will be increasingly keen to tap into the continents high-growth markets at a time of sclerotic growth in the developed world.
Demographics
The continent will have the youngest, fastest-growing and fastest-urbanizing population in the world. Its population has increased from around 110 million in the mid-19th century to an estimated 1 billion people today. This is set to double before 2050.
Investment-growing trends
With the increase in urbanization and disposable income within the middle class, the demand for modern goods and services is beginning to surge. According to the Economist, by 2030 Africas top 18 cities could have a combined spending power of US$1.3 trillion. By 2050, 63% of Africas population will be urban.
The Three-tier consumer markets

Africas consumers can be divided into three main tiers, and businesses will need to build their strategies accordingly. 1. The rising and the future middle-class market of 350 500 million, similar to the segments in India and China. 2. The consumers at the bottom of the pyramid, which is growing, and the ascent of the mobile phone has proven that there is a market. 3. The challenge for firms to move from basic goods to affordable products. Companies will need to look at all three strategies, but new investors and existing investors will also need to look at the broader consumer markets
The mobile-phone revolution

Due to Africas very poor landline infrastructure and the easy availability of mobiles, the mobilephone market has grown rapidly. According to the Economist, the number of mobile subscribers jumped from around zero in the mid-1990s to 88 million in 2005, and reached an incredible 360 million in 2010, which equates to 45% of the population. It also explains that in addition to its tele-banking capabilities, the mobile phone provides farmers and traders with up-to-date market information, and is becoming the main tool for accessing the Internet. Mobile Internet is growing rapidly in some markets, such as in Kenya, where subscriber numbers more than doubled in 2010 alone to 4.7m. There has also been a rapid emergence of products, which will facilitate the spread of real commerce and e-commerce as well as provide a new platform for official transfers and the payment of bills.
Natural resources
Natural resources, especially minerals and particularly oil, will remain central to many resourcerich countries that are benefiting from stronger global demand in the aftermath of recession.
Africa Investment Outlook Oil has been the main focus of foreign direct investment (FDI), but key minerals, such as gold, copper, iron ore, chrome and diamonds, and more exotic elements, are major draw-cards. Most notably, new junior mining firms, which tend to be more dynamic and responsive, are playing a key part in the investment surge. (See Appendix C: Africas distribution of natural resources).
Chinese investment in Africa

China has emerged as a leading investor in Africa in the resources sector, with an increase in initial big investments from US $681 million in 2000 to US $9.3 billion in 2010.
According to the Economist, trade between the two continents has also been rising: 12.4% of all exports from Africa went to China last year, a fifteenfold increase on 2001. Angola is the leading supplier of oil to China, followed by Nigeria.
There has also been a shift into services, and the sector has taken the largest chunk of investment. In addition, the next few years will see the development of industrial parks in key African countries. One industrial park is already operating in Mauritius, and more are planned in Nigeria, Ghana, Kenya and South Africa. The aim of these parks is to improve infrastructure and the regulatory environment, and to encourage Chinese firms to establish manufacturing industries in the parks, as they benefit from tax break holidays, favourable regulations and good infrastructure.
Outsourcing of economic activities to sub-Saharan Africa

According to the Economist, rising wages in Brazil, China, India, and other countries could prompt them to further outsource their economic activities to sub-Saharan Africa, especially in light manufacturing. These BICs are moving up the value chain with China and India in manufacturing, and Brazil in biofuels. Thus there is the potential to outsource these activities to sub-Saharan Africa. Global rebalancing between advanced and emerging economies could accelerate this process, with more rapid industry upgrading in China and India.
Low-cost inputs and consumption goods

Sub-Saharan Africa could benefit from imports available at a much lower cost from emerging partners than from its traditional partners. Low-cost capital goods boost the productivity of sub10
Africa Investment Outlook Saharan Africas producers, whereas low-cost manufactured imports benefit consumers and producers (through lower wage pressures and cheaper inputs). Intraregional integration could also boost growth by promoting horizontal FDI, creating economies of scale and improving the allocation of factors of production within the region. However there are also negative reactions to this aspect as low-cost imports also dilute the local markets and put some local producers out of work. As a result of a directly correlated increase in unemployment, countries like Angola have reacted very badly to these imports. Estimated and Projected Exports by Sub-Saharan Africa to Partners
Access to more appropriate technologies

Through intensifying trade and investment relationships with other developing countries like China, countries in the sub-Saharan African region also have access to cheaper and less sophisticated technologies that may be more appropriate for their level of development.
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Investment Challenges
The key economic risks range from weak fiscal and monetary policies, high inflation, volatile currencies, high taxes, nationalization issues, skills shortages, inadequate infrastructure and red tape.
Inflation concerns
Inflation has now returned to levels recorded before the commodity price spike in 2007-2008. In Sub-Saharan Africa, the average rate of inflation jumped to 11.7% in 2008 with soaring oil and food prices, but retreated to 8.5% in 2009 as the global downturn curbed price pressures. The annual average rate is expected to hover at around 7.1% in 2010-2012. However, inflation will remain comparatively high in a global context and will be vulnerable to fluctuations in commodity and product markets. The ongoing power crisis, severe infrastructure bottlenecks and higher tariffs will also have an impact on inflation.
An infrastructure crisis
Most operators in Africa will agree that the poor state of physical infrastructure, especially electricity and transport, is one of the biggest impediments to business. For instance, Nigeria, with a population of 150 million, has the same power capacity as Hungary, with a population of less than 10 million. These issues have also had a profound effect on investors. Very few locations have sufficient infrastructure, with the exception of South Africa, but even there power and transport provision is inadequate. Faster growth in recent years has highlighted deficiencies, exposing bottlenecks in ports, roads, rail and power supply. Although substantial infrastructure investment is under wayfor example, resource extraction deals secured by Chinese and Indian firms typically involve a commitment to build local infrastructureimprovements will take time. Africa will need investments of at least US$ 93billion in the power sector alone.
Drought
The drought in the Horn of Africa is imposing direct production, fiscal, and external costs on the countries affected by food shortages and refugees in addition to its immense humanitarian burden. The IMF estimates that the initial impact on output in Ethiopia and Kenya will be less than percent of GDP, but the final impact of the drought, and its ramifications throughout the region, could ultimately be much larger. For example, in Tanzania, the drought has reduced hydroelectric power generation, with attendant implications for not only output but also fiscal accounts
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Key Considerations
The demographic dividend
With more than one-half of its population under 24 years of age, Africa is one of the most populated and youngest markets in the world. According to the Economist, by 2050 Africas population of 2 billion will have overtaken that of India (1.6 billion) and of China (1.4 billion).
By 2015, the proportion of Africas youth (under 15 years) is expected to rise to 45% of the total population and urbanizing the fastest.
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Chinese conflicts of interests

One key issue that has arisen is whether it is the responsibility of Chinese investors to develop skills and provide education, or the responsibility of the African governments to develop the skills needed to create opportunities, jobs and growth. Based on the trends to date, both the governments and investors, whether they are Chinese or other international operators, will need to invest in education, skills and infrastructure. If not, as in Europe, history will repeat itself and show that the transfer of skills and development of human capital will remain one of the biggest challenges in Africa. This is something, however, that Indian investors are addressing to some extent. As part of their African strategy, which is to secure resources, efforts to transfer skillson a small scaleare taking place. If left unchecked, the prospect of an African Spring cannot be discounted.
Uncertain Stock Markets

The IMF predicts that over the next five years, seven of the top-10 fastest-growing economies will be in Africa. A large amount of the higher GDP growth in Africa is attributed to Chinese statelinked investments. In countries such as Angola and Ethiopia, where China is dominant, deals are generally brokered bilaterally, closed to outside bidders, without use of international banks. With the increase in Africa funds and allocations to Africa in global emerging market funds, there are billions of dollars of new capital available to Africa-related stocks. However, the biggest exchange - Nigeria's - has daily trading volumes only in the low tens of millions of dollars, which makes the building of brokerage operations across the continent infeasible at the moment.
Sustainability of the Impact of Investment Drivers

The impact of the surge in external demand as well as the increase in urbanization and consumerism offers hope that this economic growth may be sustainable. The challenge, however, is how quickly they will translate into actual growth in particular countries with a host of other variables, including democracy and governance, the state of infrastructure and the pace of deregulation taken into account.
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Appendix
A. Sub-Saharan Africa: Country Groupings by Resource
*Country has reached the completion point under the enhanced HIPC Initiative and has qualified for MDRI relief.
Key Points: The 7 oil exporters are countries where net oil exports make up 30% or more of total exports. The 11 middle-income countries not classified as oil exporters or fragile countries had average per capita gross national income in the years 200810 of more than US $992.70. The 14 low-income countries not classified as oil exporters or fragile countries had average per capita gross national income in the years 200810 equal to or lower than US$992.70 and IRAI scores higher than 3.2.
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B. Member Countries of Regional Groupings
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C. Africas distribution of resources
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D. Total Investment: Countries
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Diagrams in-text
A. Sub-Saharan Africa Output Growth Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011) B. Sub-Saharan Africa: Macroeconomic indicators Dec 2005 June 2011 Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011) C. Sector Composition of Chinas Investment in Africa by end-2009 Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011) D. Partners The Chinese in Africa: Trying to pull together. Published April 20, 2011. From Print Edition. http://www.economist.com/node/18586448. Web. Accessed Mar 25, 2012. E. Africas Slice The Chinese in Africa: Trying to pull together. Published April 20, 2011. From Print Edition. http://www.economist.com/node/18586448. Web. Accessed Mar 25, 2012. F. Estimated and Projected Exports by Sub-Saharan Africa to Partners Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011) G. Population forecasts for selected countries World Population Projections: Growing pains. Published May 5 2011. The Economist Online. http://www.economist.com/blogs/dailychart/2011/05/world_population_projections. Web. Accessed Mar 25. 2012
Diagrams in Appendix
A. Sub-Saharan Africa: Country Groupings by Resource Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011) B. Member Countries of Regional Groupings Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011) 20
C. Africa: Key Resources "Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit. (2012): n. page. Print D. Total Investment by Country Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011)
Other Sources
"Africa: open for business. The potential, challenges and risks." Economist Intelligence Unit. (2012): n. page. Print "GCC trade and investment flows: The emerging-market surge." Economist Intelligence Unit. (2011): n. page. Print. ONeill, Dominic. "Investment Banks Eye the Last Frontier: Africa." Euromoney. 00142433 (2011): ABI/INFORM Global; ABI/INFORM Trade & Industry; ProQuest European Business. Web. 24 Mar. 2012. "Sub-Saharan Africa: Sustaining the Expansion." World Economic and Financial Surveys: Regional Economic Outlook. Oct (2011): Web. 27 Mar. 2012.
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Disclaimer This publication contains general information only, and Sub-Saharan Consulting Group is by no means of this publication, rendering professional advice or services. Consult a qualified professional before making any decisions or taking actions that may affect your finances or business. Sub-Saharan Consulting Group 2012 Designed and written by Sharon Obuobi 22

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Report by Sharon Obuobi